5/23/2008 @ 3:20PM

The New Silk Road

China and the Gulf states are falling into each other’s arms. Give matchmaker Victor Chu, of Hong Kong’s First Eastern, a share of the credit.

Victor Chu was an elusive quarry. For years Sameer Al Ansari, the chief executive at Dubai International Capital, was trying to recruit the Hong Kong investor as a director on his board. But Chu, the chairman of First Eastern Investment Group and a prescient booster of Chinese-Arab trade, was always too busy sharing his expertise with other companies.

Finally, between workshops at the 2005 World Economic Forum in Davos, Al Ansari won Chu over. It was just the kind of deal, consummated with a firm handshake over weak coffee, that one would expect from the rich and powerful who inhabit the forum’s corridors. But economists may one day mark it as a historic convergence of guanxi and wasta–the ancient Chinese and Arabic terms for entrée–and a key milestone in the epic revival of the old Silk Road. “Asia is just as it is here,” Al Ansari says from his office at the Dubai International Financial Center, home to the city’s ever ripening stock exchange. “It’s important to have the right connections. Victor knows the languages of Asian markets. He’s the partner I wanted.”

Since then Sino-Arab commerce has evolved into the world’s fastest-growing commercial relationship. While the developed world, led by the U.S., staggered through a global credit crunch, China’s gross domestic product grew 11% in the first quarter, and the Gulf Cooperation Council–the oil-rich federation of Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates–averaged nearly 7% growth in the same period. Last year trade between the two regions totaled $240 billion, double what it was in 2000. While Persian Gulf investment in China last year was estimated at $20 billion, a report by JL McGregor & Co., a Beijing consulting firm that advises U.S. hedge funds and other clients, estimates that Gulf investors will shift a third of their portfolios, or about $250 billion, to China over the next five years.

While Sino-Arab commerce began as very much a one-way affair, with the Gulf providing the capital and China the opportunities, deals are now flowing in both directions. Last year Beijing’s Zhongon Construction Group set aside $100 million for the purchase of Dubai real estate, while Dalian’s Dashang Group announced plans to invest $200 million in Dubai’s retail industry. The problem, investors point out, is that neither side has well-developed capital markets. Without fixed-income securities the best way to put their riches to work is through acquisitions. Private-equity specialists are lacing the two regions ever closer, and Victor Chu, who launched First Eastern in 1988 and has more than $1.5 billion under management, has an impressive ball of string.

In April Chu, 50, redeemed his bullish talk about the future of Sino-Arab trade when he and Al Ansari, 44–a British-trained accountant who worked for consultant and financial-advisory firm BDO Seidman in London before moving to Ernst & Young in Dubai–launched China Dubai Capital. It’s a $1 billion vehicle that aims to invest in Chinese companies with the potential to expand to the Gulf or go public on Arab stock markets, and it hopes to list the first outfit within two years. Al Ansari will take the lead in gathering funds from Gulf and Asian institutions and leading family investment offices, and Chu will harvest the companies. The plan is to purchase 20% to 40% stakes in Chinese companies looking for capital to expand. The fund’s average investment in a company will be $20 million to $50 million.

It’s a common strategy in the way private equity is practiced in both China and the Gulf. Unlike leveraged buyouts in the U.S., where firms take over mature assets with borrowed capital, Sino-Gulf investors eschew debt, limit themselves to minority stakes and target companies that are still in formation. “We do buy-ins rather than buyouts,” Chu says in a phone interview from Shanghai, where he was spending a day on his way back to Hong Kong after a tour of the Gulf states. “Unlike the Carlyles of the world, we’ll help companies develop their business before going public. It’s more a venture-capital strategy than an lbo.”

While neither Chu nor Al Ansari will reveal which companies they’re looking at, they do say they favor the construction and health care sectors. The main objective, according to Al Ansari, is to use China’s surplus of quality unlisted companies to boost the Gulf’s capital markets. That’s certainly fine by Dubai’s securities regulators, who last fall entered into a $6.5 billion cross-shareholding agreement with Nasdaq, the London Stock Exchange and the Nordic exchange operator OMX Group in a bid to make the Arab boomtown a leading financial center. “We’re working with [the Dubai exchange] to pave the way,” says Al Ansari. “There are 800,000 Chinese companies looking to list.”

For Chu, the Dubai China Fund is only the most recent expression of his faith in the Middle East as China’s once and future primary market for its companies. After all, he likes to point out, Arab-Chinese commerce dates back to at least the 4th century, when Arab seafarers established settlements near Canton. “I’ve been talking about the new Silk Road for years,” says Chu, whose clipped English accent is the legacy of British schooling in colonial Hong Kong and a university education in London. “China needs a secure energy source, and Gulf investors need a high-growth market to invest their capital. The two regions have had diplomatic relations dating back a thousand years. This is a very strategic relationship.”

Chu’s first business trip to the Middle East was more than 15 years ago. At a time when most Asian investors were focusing on high-growth markets close to home, he was nurturing contacts and making introductions between Chinese construction and engineering companies and Gulf contractors and officials. In 1998 he opened an office in Bahrain, where First Eastern has a banking license.

His timing couldn’t have been better. A year later the U.S. would respond to the Sept. 11 terrorist attacks with regulations against suspect money flows, which annoyed and inconvenienced many Arabs. Over the next six years, turned off by America’s sluggish economy as well as a perceived hostility to Arabs, Gulf investors would divest themselves of an estimated $200 billion in U.S. assets, according to a JL McGregor report on Middle East investment in China.

The U.S. loss would be China’s gain, thanks in no small part to Chu’s foresight. “We were always a few steps faster than the others,” says First Eastern managing director Elizabeth Kan. “When our Arab partners wanted to diversify and started looking at Asia, we were ready.”

A lot could happen to preempt a Silk Road revival. Oil prices could tank. China’s double-digit growth could finally sputter. An attack on Iran could torpedo the Middle East and the global economy, given the effect it would have on energy prices. But even then, the indefatigable optimist Chu suggests, he’ll be an early buyer among the rubble. “We’d be back to the drawing board, but only in the short term,” he says. “Either way, this region will define history over the next quarter-century.”